CONTRIBUTORS
Templeton Global Macro®
In this issue
Since 2018, Templeton Global Macro (TGM) has published twice-yearly updates to its sovereign environmental, social and governance (ESG) index. In these updates, we reiterate the ESG index methodology, describe any changes we may have made, and provide the latest analyst scores with background to any major shifts.
The standout feature of the ESG index is that rather than calculating just the current scores of countries, scoring is also done on a forward-looking basis, reflecting anticipated policy changes or societal shifts as well as each country’s trajectory. We believe that positioning in line with positive projected trends, and avoiding negative ones, may support potential alpha generation in sovereign fixed income investing. This approach allows countries that might otherwise not be emphasized in sustainable investing to be recognized as potential future success stories.
In this October 2026 update, we discuss how the index methodology has been kept stable in the latest round of scoring, after five significant changes in the preceding two years. While the baseline index methodology is stable, the scores show major realized improvements in countries such as Namibia, Qatar, Serbia and Saudi Arabia across categories such as the business climate, unsustainable practices and demographics. Meanwhile, negative realized shifts are observed in, for instance, Guatemala, Albania and Costa Rica, which all lost ground in labor freedom.
On a forward-looking basis, we see continued deterioration in Japan as well as across developed Europe, with France, Germany and the United Kingdom among the more negative outliers in the index. We project positive changes in major emerging markets such as South Africa, Colombia and Hungary, as well as frontier markets, including Uzbekistan and Honduras. In the latest version of the index, the number of countries with projected positive momentum has fallen from 53 to 51, while negative momentum is observed in 24 countries, up from 20 in the previous round.
WHAT ARE THE RISKS?
All investments involve risks, including possible loss of principal.
Fixed income securities involve interest rate, credit, inflation and reinvestment risks, and possible loss of principal. As interest rates rise, the value of fixed income securities falls. Bond prices generally move in the opposite direction of interest rates. Thus, as prices of bonds in an investment portfolio adjust to a rise in interest rates, the value of the portfolio may decline.
Changes in the credit rating of a bond, or in the credit rating or financial strength of a bond’s issuer, insurer or guarantor, may affect the bond’s value. Low-rated, high-yield bonds are subject to greater price volatility, illiquidity and possibility of default.
International investments are subject to special risks, including currency fluctuations and social, economic and political uncertainties, which could increase volatility. These risks are magnified in emerging markets.
Investments in emerging markets, of which frontier markets are a subset, involve heightened risks related to the same factors, in addition to those associated with these markets’ smaller size, lesser liquidity and lack of established legal, political, business and social frameworks to support securities markets. Because these frameworks are typically even less developed in frontier markets, as well as various factors including the increased potential for extreme price volatility, illiquidity, trade barriers and exchange controls, the risks associated with emerging markets are magnified in frontier markets.
The manager may consider environmental, social and governance (ESG) criteria in the research or investment process; however, ESG considerations may not be a determinative factor in security selection. In addition, the manager may not assess every investment for ESG criteria, and not every ESG factor may be identified or evaluated. Impact investing and/or environmental, social and governance (ESG) managers may take into consideration factors beyond traditional financial information to select securities, which could result in relative investment performance deviating from other strategies or broad market benchmarks, depending on whether such sectors or investments are in or out of favor in the market. Further, ESG strategies may rely on certain values-based criteria to eliminate exposures found in similar strategies or broad market benchmarks, which could also result in relative investment performance deviating.
ESG Scoring: While the investment manager has clearly delineated subcategories for the purpose of ESG scoring, some of the factors that are considered when scoring a country are subjective and, consequently, the investment manager’s or a third party’s scoring may not always accurately assess the sustainability practices of a country in a specific subcategory. In addition, the manager considers each country that issues bonds in which they may invest holistically with respect to its sustainability practices. Therefore, certain countries may engage in activities that are not sustainable and that may be contrary to the principles of ESG investing but, because of the Investment manager’s holistic approach, such practices may be outweighed by other more sustainable practices resulting in the country scoring well overall on the TGM-ESGI. Similarly, some countries may have higher scores in one category and lower scores in another, which may skew the results of the final score of a country making it seem more ESG-friendly than it is. There is also the risk that the countries identified for investment by the investment manager do not act as expected when addressing ESG issues.
The companies and case studies shown herein are used solely for illustrative purposes; any investment may or may not be currently held by any portfolio advised by Franklin Templeton. The opinions are intended solely to provide insight into how securities are analyzed. The information provided is not a recommendation or individual investment advice for any particular security, strategy, or investment product and is not an indication of the trading intent of any Franklin Templeton managed portfolio. This is not a complete analysis of every material fact regarding any industry, security or investment and should not be viewed as an investment recommendation. This is intended to provide insight into the portfolio selection and research process. Factual statements are taken from sources considered reliable but have not been independently verified for completeness or accuracy. These opinions may not be relied upon as investment advice or as an offer for any particular security.